GM to Fund Opel/Vauxhall Restructuring, Abandons European Loan Guarantee Requests

General Motors (GM) has withdrawn all requests for loan guarantees from European governments to support its financial restructuring of its main European unit Opel/Vauxhall. According to a company press release, it will instead look to fund the 3.7 billion euro (US$4.6 billion) itself as a result of its improving financial performance. The decision has been effectively prompted by the decision made by the German government last week to refuse GM's request for 1.1 billion euro in loan guarantees (see Germany: 10 June 2010: German Government Finally Rejects Opel/Vauxhall's Loan Request, GM "Very Disappointed"), which would have been by far the largest contribution by a single government. Germany was being asked to shoulder the majority of the funding sought from government loan guarantees as it hosts around half of Opel's 50,000-strong European workforce and four manufacturing plants. However, there were powerful factions in the German government who had campaigned against issuing the loan guarantees, including Finance Minister Rainer Bruederle. With Germany turning down GM's request it put serious doubts over smaller pledges from the Spanish and U.K. governments and GM has subsequently opted to take charge of the process itself. In a statement, GM Europe and Opel/Vauxhall chief executive Nick Reilly said, "We appreciate the support indicated by certain governments, especially the UK and Spain, but we need to move on. The decision of the German government last week was disappointing and means that the conclusion of these guarantees is again likely to be months away. To be clear, our funding needs have not changed and we were led to believe that loan guarantees made available to other European companies under the EU program to help offset the impact of the global economic crisis, would be equally available to Opel/Vauxhall. But, after a very long process defined by governments, this has turned out not to be the case... We are grateful for the decision and support of our parent company, which will allow us to move forward with confidence in this very competitive industry. We cannot afford to have uncertain funding plans and new time-consuming complex negotiations at this time when we need to keep investing in new products and technologies. With these new products and the impact of restructuring, we expect to return to profitability shortly."

Outlook and Implications

GM's return to profitability in the first quarter had made the political argument for the German government to grant the loans very hard to justify. The decision also effectively ended GM's bid to secure loan guarantees from the other European governments involved. It is possible to interpret the GM decision as justification for the German government's hard-line stance on not providing the guarantees. Bruederle claimed that GM had enough cash to finance the restructuring itself and that German taxpayers' money should not be used to fund a U.S.-owned company that was back in profit (see United States: 18 May 2010: General Motors Posts US$865-Mil. Q1 Profit, First in Three Years). Excluding funds in escrow, GM had gross cash of US$23.3 billion at the end of March compared with US$14.2 billion of debt. Its first-quarter funds from operations exceeded capital expenditure by about US$1 billion. GM was also always on the back foot following its U-turn on the decision to sell Opel/Vauxhall to the consortium comprising Magna International and Sberbank last November. That angered and embarrassed the German government, which had heavily backed the Magna bid in the run-up to the German election last September, and the firm was always faced with elements within the government and its own workers' council who were against GM retaining ownership. However, it appears that the latter have been placated after Reilly and his management team finally agreed a programme of 265 million euro a year of cost savings from Opel/Vauxhall's European workforce in May (see Europe: 24 May 2010: Opel/Vauxhall Agrees Over 1-Bil.-Euro Savings with Unions, Waits for German Government Response).

GM also, albeit inadvertently, undermined its own case for the loan guarantees after more than trebling its own originally pledged contribution to the restructuring process in March to 1.9 billion euro. This created an impression that GM had been sandbagging over the true state of its finances, am impression that the anti-GM elements in the German government such as Bruederle were only too keen to foster. This announcement by GM finally draws a line under a tortuous process that has dragged on for 18 months, led to cross-border and internal political wrangling as well as invoking the potential wrath of the European Union competition commission. Opel's press release for the restructuring plans and their anticipated effect on the company's financial performance was upbeat and Opel/Vauxhall can now look forward unhindered by political machinations. It will now press ahead with the restructuring plan which will include plans to reduce the workforce by 8,300 jobs and close the plant in Brussels. Belgium. It will hope to generate the majority of job cuts through early retirement and voluntary redundancy but some compulsory redundancies should not be ruled out. However, Opel/Vauxhall has ambitious product development and investment plans which will cost 11 billion euro over the next five years and which include the introduction of a new A-segment city car. The company's current product portfolio actually looks quire strong with the new C-segment Astra being launched on the European market at the end of last year, while the highly regarded D1–segment Insignia is also a relatively recent addition having been introduced in 2008. The company will also has 30,000 advance orders for the new Meriva which was launched at this year's Geneva Motor Show, while the company is planning seven new model launches this year (including the Astra and its variants) and five next year, including the Ampera plug-in hybrid.